Beware of the new BIR audit program

More than a decade ago, a taxpayer could expect only one tax investigation by the Bureau of Internal Revenue (BIR) in a given year, and seldom for two successive years.

But now, a taxpayer can be investigated up to three times in the same year: first, under a normal tax audit (i.e., covering all taxes); second, under a value-added tax (VAT) audit; and third, under a Letter Notice audit (which is based on discrepancies arising from the computerized matching of data between the taxpayer’s records and its customers and suppliers).

In the worst case, a taxpayer can be investigated every year without reprieve.

Taxpayers who are subjected to successive tax audits will finally obtain relief from the BIR’s new Audit Program under Revenue Memorandum Order (RMO) 19-2015. Under the RMO, taxpayers who were subjected to tax audit for two successive years will no longer be subject to tax audit on the third year, unless the taxpayer has under-declared sales/income or overstated expenses/deductions by at least 30% (which is considered prima facie evidence of fraud).

The RMO also provides that a full tax audit will no longer include taxes that had been previously examined (e.g., VAT audit under the VAT Audit Program or under a claim for VAT refund).

However, tax examiners are now required to investigate taxpayers who have not been audited but have been in operation for more than three years.

The foregoing new policies appear reasonable as successive tax audits will likely result in lower deficiency taxes among frequently audited taxpayers due to a progressive learning curve. Moreover, rather than concentrating on a limited few, the similarly limited manpower of the BIR would be optimized by targeting other taxpayers, achieving a more inclusive audit.

The RMO also provides that the following cases are subject to mandatory audit:

• Claims for refund (e.g., VAT, income tax, erroneous payment);

• Applications for tax clearance for dissolution or retirement of businesses with gross sales/receipts exceeding P1 million or with more than P3 million in gross assets ;

• Cases with unresolved Letter Notices;

• Request for tax clearance of taxpayers undergoing merger/consolidation and other types of corporate reorganizations;

• Estate tax returns; and

• Policy cases identified by the Commissioner of Internal Revenue.

On the other hand, the following are considered priority cases:

• Taxpayers reporting gross/net loss or no taxable income or no tax due for two (2) consecutive years;

• Taxpayers with income tax due of less than 2% of gross sales/revenues;

• Taxpayers with increase in assets of more than 50% from the previous year but with reported net loss;

• Professionals;

• Sellers of goods and services via e-commerce;

• Taxpayers with intelligence information such as specific business knowledge, third party data and publicly available information (e.g., from media press releases vs. actual revenue/tax declaration per return, etc.);

• Taxpayers who have failed to comply with the submission of information returns required under existing revenue issuances (e.g., Alphalist, Inventory List, List of Tenants, Summary List of Sales/Summary List of Purchases, eSales);

• Issue-oriented audits (e.g., transfer pricing, Base Erosion Profit Shifting, industry issues, etc.);

• Taxpayers whose compliance is below the established benchmark rate;

• Taxpayers enjoying tax exemptions/incentives;

• Taxpayers with shared expenses and other interrelated charges being imputed by a parent company to its affiliates and likewise an affiliate to other affiliate in a conglomerate;

• Specific industries: Hospitals, Advertising Agencies, BPOs, Insurance, Amusement Centers, Restaurants, Telecommunication, Real Estate; and

• Other priority audits that may be identified by the BIR.

The list is so extensive in scope that it seems to include most individual and corporate taxpayers.

Finally, the RMO requires examiners to strictly comply with the prescribed periods in the completion of their audit (reinvestigation) and submission of their reports; failure to do so will result to administrative sanctions. For instance, a report on the results of a tax investigation must be submitted not later than 180 days (for non-Large Taxpayers) or 240 days (for Large Taxpayers) from the issuance of the Letter of Authority.

With these new rules and the BIR’s increasing revenue targets, one could expect a BIR audit sooner than later. Accordingly, it would be wise for businesses to improve tax compliance by being informed of the pertinent tax laws and rules affecting them, and to check accounting records vis-a-vis tax returns, as well as the adequacy and completeness thereof for submission during a tax audit.

The foregoing steps can be undertaken internally or thru the assistance of a trusted and competent tax advisor.

As we all know, taxation is the life blood of the government. Without taxes, the government cannot spend for basic social services, and infrastructure. Let’s do our share in nation-building by paying correctly our taxes so we can then have the right to demand the government to improve its services.

The views or opinions presented in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from the article.

Carlos R. Mateo is a director at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.

Taxwise or Otherwise : Carlos R. Mateo

Economy : Business World

December 2, 2015

Are we giving up on income tax cuts?

Last week, congressmen reportedly gave up on their bid for tax cuts after repeated indications of opposition from Malacañang.

We can hardly accuse Congress of not trying, with not less than 10 bills filed proposing tax reform. Various versions of these bills have appeared and been discussed in due course. Not one of them has been approved by the President.

Many are asking why securing the President’s approval is difficult. Did President Benigno S. C. Aquino III not promise to listen to his “bosses,” and does Congress not represent the voice of these bosses -- the Filipino people?

The main stumbling block to the approval of the proposed tax reform appears to be the anticipated loss of government revenue without compensatory measures to replace the lost collections. According to the latest version of the proposed bill on individual income tax, the top tax bracket paying 32% will now apply to those with an annual income of more than P1 million as against the current threshold of only P500,000, dating back to 1997. The lower brackets were likewise recalibrated to reflect the impact of inflation. The Executive department believes that the updating of individual income tax brackets would slash the government’s revenue significantly, on the expectation that most Filipinos will see their income tax payments reduced.

Supporters of the reform see the alleviation of the plight of the working class by increasing take-home pay. The latest version of the proposed bill would see an employee earning P20,833 per month (or P250,000 per year), shift to a bracket charging 20%, rather than 25%. While 5 percentage points may not seem much, to the working classes this represents a significant amount.

It has also been argued that foregone government revenue will be replaced by increased individual spending, which the government will benefit from in the form of more transaction taxes like value-added tax. Any lost government revenue will flow back into the economy and eventually find its way into the treasury.

To add a further argument, higher take-home pay will make the Philippines competitive in the era of accelerating international trade and investment. More money in employees’ pockets will reduce pressure on employers to raise wages, keeping labor costs down and making the country more attractive to investors. These investors could ultimately boost our economy.

These are of course some of the more obvious points raised in what has been along drawn-out debate. Unfortunately, the Executive department seems to be viewing the proposed reform from a different perspective. Pro-tax reform economists, accountants, lawyers, data analysts, and other experts have said their piece, but it appears they cannot good news about tax reform this holiday season.

In any event, do we really need any more experts to say that the 18-year-old 1997 Tax Code income tax bracket is outdated? Is it not obvious that the value of salaries has changed significantly since 1997?

Set aside the statistics on foregone revenue... Setting aside the politics... Remove counter-arguments involving international trade... and at the end of the day the reform is about social justice, an issue that connects with many Filipinos.

The 16th Congress will recess between Dec. 19 and Jan. 18. Next year’s Congressional work will be disrupted by campaigning. Any last-ditch efforts by members of Congress will need to be done within a very limited time. Will they try to convince the Executive department once more? Will they decide to override Presidential opposition? Could they do something else? We don’t know yet.

We can take comfort in the fact that certain members of Congress have vowed to re-file the bill when the next administration comes along if nothing happens to the current legislation. Many hope that the reform will be given high priority, possibly to take effect within the 2016 tax year. After all, the voice and interest of the Filipino people, as represented by the Congress, ought to be heard in a republic like ours.

When it comes to reducing taxes, we are not giving up.

Olivier D. Aznar is a partner with the Tax Advisory and Compliance division of Punongbayan & Araullo.

Let’s Talk Tax : Olivier D. Aznar

Economy : Business World

December 1, 2015

Updates on employee taxes

December is just around the corner, the month of giving and spending extravagantly. Employees like me are very much eager to get hold of their 13th month pay, Christmas bonuses and final pay checks for the year. By this time, employers should already be preparing for the annualization of their employees’ compensation, which will determine the adjusted withholding tax due on compensation, and the employees’ net final pay for the year.

On the annualization of compensation, it is important to take note of the several tax regulations issued this year which affect the taxability of employees’ compensation income.

The most significant among these is the passage of Republic Act (RA) 10653 on Feb. 12, 2015, increasing the tax exemption threshold from P30,000 to P82,000 for 13th month pay and other benefits. This will be enjoyed by compensation income earners starting this year.

Employers should be wary, however, about which benefits the increased threshold is applied to. Among the other benefits covered by the new tax exemption threshold include productivity incentives, Christmas bonus, gifts in cash or in kind and other benefits of similar nature actually received by officials and employees of both government and private entities. This also covers the excess amount of the de minimis benefits. Revenue Regulation (RR) No. 3-2015, which implements RA 10653, also clarified that the P82,000 exemption shall neither apply to other compensation received by an employee under an employer-employee relationship, such as basic salary and other allowances, nor to self-employed individuals and income generated from business.

Also at the beginning of this year, the Bureau of Internal Revenue (BIR) issued RR No. 1-2015, which added to the list of non-taxable de minimis benefits those benefits provided under a collective bargaining agreement (CBA) and productivity incentive schemes amounting to P10,000 per employee per annum. This issuance has raised some concerns of the taxpayer-employers on how certain benefits or incentives shall be classified. One of the concerns is the award given to a sales employee who was able to meet or exceed his sales quota. Will such sales award be classified under the other benefits subject to the P82,000 exemption threshold; the employee achievement awards subject to P10,000 de minimis threshold; or the productivity incentive scheme amounting to P10,000 provided under RR 1-2015? Considering that the three classifications vary in the ceilings involved as well as the required form of the benefit to be provided (whether in cash or in kind, or strictly in the form of a tangible property only), it is important that the BIR issue a clarification to avoid any dispute on interpretation and implementation.

Other than the increases in tax-exempt thresholds for certain employee benefits, the BIR also released several issuances during the year which provide for certain changes in the submission of documents in relation to employees’ compensation and registration information.

On March 2015, the BIR issued RR No. 2-2015 which sets forth the mandatory submission of employee’s certificate of compensation payment/taxes withheld or BIR Form 2316 in soft copies or “PDF” file format to be stored in a Digital Versatile Disk-Recordable (DVD-R). The duly accomplished DVD-R shall be submitted to the BIR Office where the taxpayer-employer is registered not later than Feb. 28 following the close of the calendar year, together with a notarized certification stating that the DVD-R is submitted in compliance with RR No. 2-2015; that the contents of the DVD-R being submitted conforms to the conditions/specifications requirements set by the BIR; and, that the soft copies contained therein are complete and exact copies of the original document. The mandatory submission of BIR Form 2316 in soft copy is required for all taxpayers registered with the large taxpayers service (LTS). However, should any non-LTS taxpayer opt to adopt the requirements prescribed by this regulation, he may freely do so but such option may no longer be revoked.

Another recent change initiated by the BIR is the electronic updating of employee’s exemption registration. Under Revenue Memorandum Circular (RMC) No. 59-2015, employees shall no longer file their certificate of update of exemption. Instead, the filing of BIR Form 2305 shall now be coursed through the employer. Using the Update of Exemption of Employees Data Entry Module, which can be downloaded from the BIR Web site, or the Microsoft Excel program, the employer inputs all registration updates of its employees one by one.

Updates in the employees registration covered by this electronic submission are limited only to additional exemption for qualified dependents, change of marital status, and execution of the “waiver to claim the additional exemption” by the husband or revocation of the previously executed “waiver to claim the additional exemption by the husband”.

After validating the CSV file using the 2305 Batch File Validation Module, the CSV file shall then be transmitted to the BIR via e-mail to BIRFORM_2305@bir.gov.ph. In addition to the electronic submission of updates in employees’ registration, employers are required to submit with the RDO/LTD having jurisdiction over the place of its office the following documents on or before the 10th day of the following month:

(i) accomplished BIR Form 2305 signed by both the employee and employer together with the required documentary requirements (e.g. NSO certified birth certificate/marriage contract);

(ii) systems-generated e-mail notification of electronically filed BIR Form No. 2305; and

(iii) printed alphalist of employees and information update report listing the names of those with changes for the month only which can be generated from the data entry module or printed excel file following the lay-out prescribed under Annex F of the circular.

Although no specific penalties in case of failure to comply with the electronic submission of the BIR Form 2305 was mentioned in the RMC, taxpayer-employers shall take into consideration the consequence of failure to update the employee’s registration, more particularly with regard to claiming of additional exemption. Section 2.79.2 of RR No. 2-1998, as amended, provides that in case of failure to file BIR Form No. 2305, the employer shall withhold the taxes based on the reported personal exemptions existing prior to the change of status and without reflecting any change. Any refund or under withholding that shall arise due to the violations shall be covered by the appropriate penalties under the pertinent provisions of the Tax Code, as amended, and the applicable regulations issued by the BIR.

The above-mentioned are only updates on employee taxes which took effect this year. Considering the many tax rules on compensation income, a taxpayer-employer must ensure, among others, that it observes the proper tax treatment on various benefits provided to employees to avoid possible assessment for deficiency withholding tax and disallowance of expense in case of failure to subject any taxable compensation income to withholding tax.

One way to avoid reporting the incorrect amount of taxable compensation, non-taxable compensation or withholding tax due, is to prepare the annualization of employees’ compensation on or before the end of the calendar year to avoid cramming, especially in the case of taxpayers with a significant number of employees. In any case, the employer shall ensure that the payment of compensation for the last payroll period is considered in the annualization. Ideally, the correct amount of compensation and withholding tax due, as adjusted for the year, shall be reflected in the December BIR Form 1601C, as it is the last tax remittance return for withholding tax on compensation that will be filed for the year.

Lastly, the employer shall also see to it that all administrative requirements in relation to employees’ compensation and registration information are strictly complied with to avoid any penalties.

Keeping abreast of all the latest tax issuances should always be a top priority for all taxpayers.

With all these new developments concerning employee taxes, employers shall take full responsibility for determining the correct amount of taxes to be withheld from their employees’ compensation income. Not only are we, the employees, concerned with simply receiving our net pay checks, but also with that significant portion of our hard-earned income that is remitted to the government.

Arianne Cyril L. Mandac is a senior with the Tax Advisory and Compliance division of Punongbayan & Araullo. P&A is a leading audit, tax, advisory and outsourcing services firm and is the Philippine member of Grant Thornton International Ltd.

Let’s Talk Tax : Arianne Cyril L. Mandac

Economy : Business World 

November 23, 2015

Defenses for common tax audit issues

While it is indisputable that taxes are vital to the country’s growth, one of the most unpleasant experiences for a taxpayer is to receive a large and baseless assessment which requires a defense. Those experiencing it for the first time may be filled with fear and panic. Further aggravating a taxpayer’s situation is the fact that during discussions, the tax examiners may continue to insist on their position despite clear and factual evidence to the contrary.

Indeed, a tax assessment issued by the Bureau of Internal Revenue (BIR) is an unavoidable and serious matter that one cannot ignore. As such, the key to effectively handling tax assessments is to know the process and the various legal remedies available to a taxpayer. Although it is recommended that one obtain the services of a tax professional, it would be prudent for a taxpayer to have a basic idea, not only of the BIR’s procedures, but more importantly of the defenses which it may raise to protest an assessment.

Below are examples of possible defenses which a taxpayer may raise against a couple of common issues raised by a tax examiner during a tax investigation.

Readers may be aware that the BIR conducts computerized consolidation and matching of data contained in a taxpayer’s tax returns and reports against those submitted by its customers and suppliers (i.e., the BIR’s Reconciliation of Listing for Enforcement (RELIEF) System). Any discrepancies are then considered grounds for deficiency tax assessment. In such cases, the concerned taxpayer may raise the defense that the assessment is based on mere presumption. The use of such ‘presumption’ as the sole basis for assessing deficiency taxes does not satisfy the due process requirement under the Tax Code. An assessment, to be valid, must have legal and factual bases. It cannot be based on mere conjecture no matter how reasonable or logical the rationale may be behind the said presumptions.

In fact, in one recent case, our Court of Tax Appeals (CTA) held that this type of assessment lacks basis, especially if a taxpayer was not provided with the corresponding information reported in the tax returns and reports filed by its customers or suppliers. As explained in that decision, such computerized data matching program of the BIR does not include the checking of the substance or contents in the returns or reports generated from the BIR’s system against other source documents. Accordingly, these data are considered to be doubtful, inconclusive and unreliable since the tax examiners do not, in anyway, validate the information fed into the system.

Another common issue raised by tax examiners against taxpayers relates to net operating loss carryover (NOLCO) that under the law, may be carried over and claimed as a deduction by taxpayers in the next three succeeding years. During tax audits, examiners disallow taxpayers from utilizing these available NOLCO on the presumption that these have been utilized in the succeeding period. In a 2013 tax assessment case, the CTA ruled that such disallowance is improper. Taxpayers should be allowed to claim the losses/credit in the current year under audit and, at most, be assessed only in the succeeding year. While it was not mentioned in the said case, it can also be inferred that the court considered the assessment to be based mainly on the presumption that the taxpayer already benefitted from the “disallowed” credit.

As mentioned earlier, assessments cannot be based on mere presumption. In a 2015 tax assessment case, the CTA maintained its position regarding the improper disallowance of NOLCO. In addition, the court ruled similarly on the proposed disallowance of the excess Minimum Corporate Income Tax or MCIT carried over to the succeeding period.

Any of the above defenses notwithstanding, a taxpayer under audit must invariably know whether the BIR complied with the proper procedures for tax assessments as laid down by our tax laws and regulations. Failure of the tax authorities to comply with their own rules and regulations is a violation of a taxpayer’s constitutionally protected right to due process, which a taxpayer may use as a ground to invalidate an assessment.

Although deficiency tax assessments are presumed correct and made in good faith, it should not be forgotten that an assessment must be conducted in accordance with our tax laws and regulations. Otherwise, such presumption of correctness can be overturned. This is where taxpayers may find some comfort -- in the knowledge that only valid assessments that are issued according to the law are a matter of real concern.

The views or opinions in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from the article.

Jocelyn T. Tsang is a Manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network. jocelyn.t.tsang@ph.pwc.com

Taxwise or Otherwise : Jocelyn T. Tsang

Economy : Business World

November 25, 2015

APEC and Philippine taxes for investors

We have been expecting for a couple of months now the Asia-Pacific Economic Cooperation (APEC) meeting which shall be held tomorrow. The government has been prepping more than ever. It is all over the news how the authorities plan the use of the streets to pave the way for the arrival of guests. New bollards have been installed in our main thoroughfares, not to mention the closure of some roads and re-routing. And of course there is the creation of Mabuhay Lane and APEC lane. Passing through EDSA every day and being caught up in the various dry runs, I can make out this event to be a really big deal.

During one of the dry runs, I was caught in terrible traffic and almost missed one of my important appointments. Of course, I blamed it on the summit. What’s behind this event? Well, as the name suggests, it is a meeting of heads of economies within the Asia-Pacific Region for the purpose of uplifting the economic welfare among members. This also means that APEC leaders will help determine policies and agreements that will promote progression of free trade and cross border investments among the members. Every economy is interconnected and there are no more hermits.

A couple of ads on a global news channel promote more investment in the Philippines. The tagline of the ad is “Your investment, our people”. Truly, the Philippine’s most promising asset is its people. Our country boasts a wide range of skilled and professional workers with high levels of technical knowledge and English proficiency.

For more than two decades, our government has constantly improved the investment environment to entice both foreign and local investors. Among the more prominent measures are the creation of economic zones and the liberalization of trade. We know that more investment will bring more jobs. More job means more taxes, which in the end will make it truly more fun in the Philippines.

WHAT CAN AN INVESTOR EXPECT WHEN PUTTING MONEY INTO THE PHILIPPINES?

Foreign Investors. On the tax side, when a foreign investor sets up a corporation, it is by default exposed to the regular corporate tax rate of 30%. Aside from which, a corporation is also required to withhold taxes for certain income payments. It can also be required to remit 12% value-added tax (VAT) on its sale of goods and services in the Philippines.

Depending on the type of activity, foreign-owned enterprises may register with the Philippine Economic Zone Authority (PEZA) or Board of Investments (BoI). The government awards both fiscal and non-fiscal incentives to these entities.

Among the fiscal incentives that can be granted to a PEZA- or BoI-registered enterprise is the income tax holiday (ITH) for the first four years of operation. This means that the entity is exempt from paying income tax on its registered activities. For a PEZA-registered enterprise, after operating for four years under the ITH regime, the registered entity may transition to a special tax incentive of 5% gross income tax (GIT) in lieu of national and local taxes.

In general, PEZA entities are subjected to 0% VAT on its sales and purchases. BoI enterprises which are engaged primarily in export are likewise entitled to 0% VAT on the sale of exported goods or services. However, for purchases of local goods or services of BoI entities, the rate is 12% VAT. Input VAT attributable to VAT zero-rated sales may be refunded or claimed as a tax credit certificate (TCC), but the claimant must be warned that the refund or credit process involves significant documentary and technical hurdles.

Other fiscal incentives for both PEZA and BoI enterprises may include, subject to certain conditions, exemption from taxes and duties on importation of raw materials, capital equipment, machinery and spare parts; and exemption from wharfage dues and export tax, duty, impost and fees.

The above discussion merely provides a glimpse of what a foreign investor can expect when doing business in the Philippines. It would be best to ask experts or consultants for a more detailed discussion on the prospective investment.

Local Investors. Local investors benefit as well from liberalized trade between APEC nations. From the tax perspective, local investors engaging in the export of goods or services may also opt to become a PEZA- or BoI-registered entity, and be entitled also to tax incentives granted by those agencies.

Nonetheless, even if an enterprise is not registered with the incentive-granting agencies, export sales may still be subject to 0% VAT. Note again that the excess or unutilized input VAT attributable to VAT zero-rated sales can be refunded or claimed as a tax credit, subject to documentary and technical requirements, as previously mentioned.

With the upcoming APEC event, we expect our President to lay on the table the many advantages of investing in the Philippines. We are expecting as well that by enticing investors to fund enterprises, our State, through our regulators, will consistently abide to its promises by making regulatory processes less complicated and more efficient.

The Philippines has posted rapid economic growth in recent years and it is not going to slow anytime soon. It is true that the Philippines has a lot to improve in terms of economic policy, infrastructure and processes to facilitate seamless trade. We struggle every day to do so, even in terms of traffic flow in the streets. Nevertheless, with conviction, I strongly believe that the Philippines is investment worthy, as we have excellent individuals working hard to get things done. And that’s one sure thing an investor can count on.

Eliezer P. Ambatali is an associate with the Tax Advisory and Compliance division of Punongbayan & Araullo. P&A is a leading audit, tax, advisory and outsourcing services firm and is the Philippine member of Grant Thornton International Ltd.

Let’s Talk Tax : Economy

Business World : November 17, 2015

The road to financial transparency: Are we ready to share?

“Building Inclusive Economies, Building a Better World” is the theme of the 2015 Asia-Pacific Economic Conference (APEC) which the Philippines is hosting. In line with this, the member countries have acknowledged the importance of transparency and the need to work together to avert cross-border tax evasion.

Recently, the Philippines took part in the global initiative allowing automatic intergovernment exchange of taxpayers’ detailed financial information.

Commissioner Kim S. Jacinto-Henares of the Bureau of Internal Revenue (BIR) confirmed that the Philippines is one of the 90 countries that would implement the Standard for Automatic Exchange of Financial Account Information in Tax Matters (“Standard”) spearheaded by the Organization for Economic Cooperation and Development (OECD).

The OECD said more than 50 countries “have committed to a specific and ambitious timetable leading to the first automatic information exchanges in 2017.” The Philippines is projected to follow suit some time in 2018.

In August 2015, the OECD released the handbook for the Standard, providing the much needed guidelines for its implementation.

According to the OECD in its background information brief prior to the release of the handbook, under the single global standard, jurisdictions obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. The handbook sets out the financial account information to be exchanged, the financial institutions that need to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions. It consists of two components: a) the Common Reporting Standard (CRS), which contains the reporting and due diligence rules to be imposed on financial institutions; and b) the Model Competent Authority Agreement, which contains the detailed rules on the exchange of information.

What needs to be done by the Philippine authorities?

According to the handbook, the participating country needs to comply with the four (4) core requirements to implement the Standard:

• First is translating the reporting and due diligence rules into domestic law, including rules to ensure their effective implementation.

• Second is selecting a legal basis for the automatic exchange of information.

• Third is putting in place information technology (IT) and administrative infrastructure and resources.

• Last is protecting confidentiality and safeguarding data.

HURDLES IN IMPLEMENTING THE STANDARD IN THE PHILIPPINES
Needless to say, there’s more to laying the groundwork for the CRS. At the periphery are statutory hurdles that put to the test a state’s capabilities and readiness for compliance. For instance, the automatic exchange of information under the Standard runs contrary to the Philippine bank secrecy laws. Under Republic Act Nos. 1405 and 6426, deposits in the Philippines are considered confidential in nature except with written consent of the depositor, or in cases of impeachment, or upon order of a competent court in cases of bribery or dereliction of duty of public officials, or in cases where the money deposited or invested is the subject matter of the litigation.

The challenge is recognized by both Finance Secretary Cesar V. Purisima and BIR Commissioner Henares who share the position that the country needs to amend its regulations if it seeks to align with the Standard. Such calls were reiterated during the presentation of the Philippine delegates in the APEC 2015 Special Senior Finance Officials’ Meeting held in Clark last 21-22 January 2015. During the event, the government affirmed the need to expand the coverage of Section 6 (F) of the National Internal Revenue Code (Tax Code) authorizing the Commissioner to access bank information for prosecution of tax evasion cases to also enable the Philippines to comply with the automatic exchange of information obligation.

The reason for the proposed expansion in coverage springs from the restricted power of the BIR Commissioner to inquire into certain bank deposits even after recent amendments. Instances where such inquiries are authorized include cases involving (1) a decedent to determine his gross estate; (2) a taxpayer who has filed an application for compromise under Sec 204 (A)(2) of the Tax Code due to financial incapacity to pay his tax liability; and (3) exchange of information by request under Republic Act 10021. Hence, the automatic exchange of information set forth by the Standard cannot happen unless the bank secrecy laws are amended and/or the Tax Code expands the power of the BIR Commissioner to inquire into certain bank deposits.

Furthermore, even though the Anti-Money Laundering Act (AMLA) allows inquiry or examination of bank deposits or investments when probable cause of money laundering has been established in court, such information cannot be used by the taxing authority under the CRS since tax evasion is not a predicate crime for money laundering. Hence, the AMLA should be amended to include tax evasion as a crime subject of any of the money-laundering offenses. Finance Secretary Purisima deems the revisions as necessary to ensure continued compliance with Foreign Account Tax Compliance Act (“FATCA”), the Standard and to improve tax collection. Currently, the Philippines is one out of only two countries which does not treat tax evasion as a predicate crime, the other being Lebanon.

Though the Standard appears promising in establishing transparency in cross border transactions and in minimizing tax evasion, the problem lies in setting up the necessary laws and infrastructures for implementation in the Philippines. With barely two years left before its implementation, our readiness to comply with the Standard still rests on shaky ground. Apparently the automatic sharing of information will not be that automatic.

(The views or opinions presented in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from the article.)

Glacy S. Tabirara is an assistant manager at the tax services department of Isla Lipana & Co., the Philippine member firm of the PwC network.

Timing of withholding tax on compensation

The recent Supreme Court (SC) case on the timing of withholding tax on compensation income has caused quite a stir among corporate taxpayers.

While the case dealt with a deficiency withholding tax assessment on unsubstantiated business expenses (representation, travel and entertainment), the SC also ruled on the subject of withholding tax on accrued bonuses based on the taxpayer’s earlier claim that the amount in question refers to bonuses accrued during the years 1996 and 1997 but paid out in 1997 and 1998.

According to the SC, the duty to withhold the tax on compensation and bonuses arises upon their accrual. While the SC decision has some basis, there are aspects of it that may be called questionable or, at least, impractical if applied sweepingly. Thus, the statement needs to be further reconciled in light of existing withholding tax rules and regulations.

Since most companies will soon be accruing bonuses and other forms of compensation towards the end of the year for pay-out to their employees next year, they face similar issues tackled in the SC case on the timing of withholding and the related issue on the deductibility of the expense.

According to the taxpayer in the case, the duty of an employer to withhold tax on compensation only arises upon actual distribution to the employees. Since the bonuses accrued in 1996 and 1997 were finally determined and distributed only in the following year, i.e., 1997 and 1998 respectively, the taxpayer claimed that its duty to withhold tax on such bonuses should only arise in 1997 and 1998.

On the contrary, the SC held that determination is not a prerequisite for the withholding tax obligation to arise. Under the rules, employers are required to deduct and pay the tax on compensation upon payment to its employees, either actually or constructively.

Further, deductions from gross income should be claimed in the same taxable year when the compensation is “paid or accrued” or “paid or incurred” depending on the method of accounting adopted by the taxpayer.

Based on a 2007 jurisprudence outlining the rules on accrual, the SC reiterated that an expense is accrued when the obligation to pay is fixed, the amount can be determined with reasonable accuracy and is already knowable at yearend. Since the taxpayer in this case applied the accrual method of accounting, it accrued or recorded the bonuses in its books and claimed it as a deductible expense in the year of accrual.

According to the SC, the act of claiming the deduction confirms that the taxpayer recognizes a definite liability, and in that sense, the bonus has already been “allotted and made available” to the employees, giving rise to constructive receipt of the bonus by the employees. On this basis, the obligation to withhold the tax due on the accrued bonuses arose at the time of accrual and not at the time of actual payment.

It is critical to understand and interpret the rules correctly especially given these developments. To my mind, certain issues and practicalities, such as the following, should be addressed:

CONSTRUCTIVE RECEIPT OF INCOME
There were no significant changes to the principle of constructive receipt under Revenue Regulations (RR) 6-82, the applicable withholding tax regulations prior to 1998 and RR 2-98, the existing withholding tax regulations.

Under both RRs, compensation is constructively paid when it is credited to the account of or set apart for an employee so that it may be drawn upon by him at any time although not then actually reduced to possession. In order to constitute payment, the compensation must be credited or set apart for the employee without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made, and must be made available to him so that it may be drawn upon at any time, and its payment brought within his control and disposition.

The RR 2-98 just expanded the definition of “constructive receipt” with the addition of the following statement:

“A book of entry, if made, should indicate an absolute transfer from one account to another. If the income is not credited, but it is set apart, such income must be unqualifiedly subject to the demand of the taxpayer. Where a corporation contingently credits its employees with a bonus stock which is not available to such employees until some future date, the mere crediting on the books of the corporation does not constitute payment.”

With the foregoing definition(s), the question is, will the principle apply in a case where the employees do not acquire a demandable right over the income, such as when the employees’ claim over the bonuses, at the time of accrual, remains unknown and therefore, restricted? In this case, there should be no payment to speak of, whether actual or constructive. Can it then be argued that there is no obligation to withhold compensation tax at the time of accrual?

TIMING OF WITHHOLDING
Under RR 6-82, the employer is required to withhold tax from the employee’s compensation when paid, either actually or constructively.

On the other hand, RR 2-98 requires that withholding of tax on compensation payments be made upon receipt of income by the employees, which aligns with the cash basis of taxation for employees. However, while the timing of withholding may have been stated differently in RR 2-98, the term “receipt” can still be interpreted as referring to income actually or constructively received.

Thus, where constructive receipt is in question at the time of accrual, such as when the bonus amount per employee is not yet allocated, how will the taxes be computed and withheld considering that the employees fall under different income tax brackets? In relation to this, there may also be some reporting concerns on the year-end alphabetical list (as attachment to BIR Form 1604CF) and the BIR Form 2316, among others.

Assuming that a reasonable allocation of the bonus per employee is available, will such estimated amounts and the related taxes withheld, be required to be reported on the employees’ BIR Form 2316? If so, will the employees then have the right to demand from the employer that same bonus amount that has been allocated to them although still estimated and not yet definite? Will there be any legal repercussions in case the actual bonus payout is lower than what has been earlier allocated? On the other hand, if not reportable on the year of accrual, how and when will the accrued bonus amount and related taxes withheld be reported on the BIR Form 2316?

Also, how will the employees’ eligibility for substituted filing be affected in the event that the actual bonus payout is different from the amount earlier allocated? In this case, the information declared in the alphabetical list and the BIR Form 2316 will not be the same. Will the employees be penalized for not filing a return in the previous year or will the employer be penalized for not correctly withholding the tax on the employees’ total compensation at yearend?

DEDUCTIBILITY OF THE EXPENSE
The additional requirement for deductibility of expenses under the 1977 Tax Code (prior to 1998) and the 1997 Tax Code (existing Code) has not changed. Under both Codes, an expense shall only be allowed as a deduction for tax purposes if it is shown that the tax required to be deducted and withheld therefrom has been paid to the BIR in accordance with existing withholding tax regulations.

Interestingly, the SC held that the withholding tax obligation of the employer (even for compensation income) shall arise at the time the income was paid, became payable, or accrued or recorded as an expense in the employer’s books, whichever comes first. In RR 2-98, however, it is quite clear that this three-trigger rule applies to payments other than compensation. Specifically for compensation, the timing of withholding remains to be at the time of the employees’ receipt of the income.

Thus, if the regulations require that the taxes be withheld from the employees upon receipt of the income (whether actually or constructively), then the condition for deductibility of the expense under the Tax Code shall be satisfied so long as it can be shown and proven that the taxes have been withheld and remitted by the employer during the proper period.

For instance, if the concept of constructive receipt is challenged on the year of accrual, then the withholding tax obligation should arise only on the date of actual payout, which is still in accordance with the regulations. Thus, provided that the obligation is carried out on the payout date, the expense should still be allowed.

The above issues are also obviously intertwined and therefore, it is critical to have a clear understanding of how the rules on withholding on accrued bonuses should be applied to avert erroneous interpretation/application. Alternatively, taxpayers may resort to finding relief under the rules of accounting on accrual (e.g., if there is basis not to accrue, but to recognize a mere provision) -- but this is an issue better left in the hands of my fellow auditors.

Raymund M. Gutib is a manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of PricewaterhouseCoopers global network.

Economy : Business World : October 7, 2015

Senior citizen’s ID: one less thing to remember

Setting aside my personal opinion on issues of public governance, I somehow feel grateful whenever our government exerts effort to show concern and filial care for our senior citizens. One concrete example is the enactment of Republic Act No. 9994, otherwise known as the “Expanded Senior Citizens Act of 2010.”

Unfortunately, while the intention of the law is to promote social justice, there are times when its implementation is afflicted by legal ambiguities. As shared by my mom, there were instances when she was denied the senior citizen’s discount (one of the benefits under the Expanded Senior Citizens Act) just because she had a “senior moment” and forgot to bring her Senior Citizen’s Identification Card (“ID”) issued by the municipality where she resides.

This practice seems to be based on Article 6 of the Implementing Rules and Regulations (“IRR”) of the Expanded Senior Citizens Act which requires senior citizens or their duly authorized representatives to present the Senior Citizens’ Identification Card issued by the Office of Senior Citizens Affairs (“OSCA”). On the basis of this provision alone, the denial of senior citizens’ discounts by some suppliers, due to the failure to present a Senior Citizen’s ID, would seem to be justified.

However, this should not be the case. Article 6 of the IRR should be interpreted in harmony with Article 5.5 of the same implementing rules. Article 5.5 enumerates the identification documents that a senior citizen may use to avail of the benefits and privileges granted under the law. In fact, these documents are reiterated in Revenue Regulations (“RR”) No. 11-2015 recently issued by the Bureau of Internal Revenue (“BIR”).

The said regulations clarified that, in implementing the tax privileges under the Expanded Senior Citizens Act, the senior citizen may use or present any of the following documents:

• Senior Citizens’ ID issued by the OSCA in the city or municipality where the senior citizen resides;

• Philippine passport; or

• Government-issued ID which reflects the name, picture, date of birth and nationality of the senior citizen. This includes Digitized Social Security ID, Government Service Insurance System ID, Professional Regulation Commission ID, Integrated Bar of the Philippines ID, Unified Multi-Purpose ID, and Driver’s License.

Thus, based on the IRR and as clarified by the BIR, the Senior Citizens’ ID should only be one among many other documents that may be used by senior citizens in availing of the benefits and privileges granted by the law, particularly the 20% senior citizens’ discount and exemption from value-added tax (“VAT”).

To limit the entitlement of our senior citizens to the benefits granted to them, just because they failed to present the Senior Citizens’ Identification Card issued by OSCA, would be in clear contravention of the objectives and purpose of the Expanded Senior Citizens Act. Among its policy intents are to establish mechanisms whereby the contributions of the senior citizens are maximized, and to adopt measures whereby our senior citizens are assisted and appreciated by the community as a whole.

Thus, suppliers of goods and services (e.g., drug stores, hospital pharmacies, etc.) should interpret the law consistent with the legislative spirit of extending the privilege to its targeted beneficiary -- the senior citizens. After all, they can always claim the discount and the input VAT as additional items of deduction from their gross income provided they comply with the conditions set forth under the rules. This includes keeping a separate record of the sales which contains the information of the senior’s citizen’s identification document as provided by RR 11-2015.

I have read on the Internet that “To care for those who once cared for us is one of the highest honors.” (Tia Walker, The Inspired Caregiver). Hopefully, the issuance of RR No. 11-2015 (effective 15 Oct. 2015) will help clear up any confusion and give additional assurance to our senior citizens that they will be able to enjoy their benefits and privileges as accorded by law.

Maria Ysidra May Y. Kintanar-Lopez is an Assistant Manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of PwC network.

Economy : Business World : October 21, 2015

Article I of the Tax Reform Bill: Give back to the people

“I don’t mind being taxed at a higher rate but I would like it to be given back to the people through public service and infrastructure and not corrupted by government officials.” I smiled upon hearing this from a fresh graduate when asked for her thoughts during a job interview about the proposed tax reform bill.

Indeed, everyone is aware of the tax reform bill pending in Congress. The bill was drafted to finally amend the almost two-decade-old income tax brackets set forth in the 1997 National Internal Revenue Code of the Philippines. The income tax rates are stuck at the 1997 levels. That means that an employee earning P500,000 per year and his company president who earns P20 million per year are subject to the same tax rate of 32%. How could we sleep on this? Do we have fair and equitable tax laws?

With a bill proposing to lower the individual income tax rate currently pegged at 32% to 17% and corporate income tax rate from 30% to 25%, we could probably rest well once it is finally approved. It has been several months ago when this news on said tax reform bill was announced on television and released on social media. Never has it been missed as one of the topics discussed with our clients during meetings or even petty conversations in the elevators. Everyone was excited until last month when it failed to get the nod of the President. Emotions poured and hopes of the people were shattered by the open rejection of Malacañang.

As one of the taxpayers, it is difficult to understand why Malacañang is against the tax reform. After all, having a higher net pay would enable me to spend more, right? Not to mention the many related taxes I am required to pay. I could easily rebut that the loss in the government’s collections on my income tax will be compensated with the additional value-added tax (VAT) that I have to pay when I shop, and there is also an income tax impact on the part of the seller for its earnings on the same item sold. It is time for the government to give back to the people and to give them the quality of life they deserve. After all, the taxpayers’ purchasing power will inevitably even generate higher taxable revenues as a whole.

In addition to what taxpayers like us would like to inform Malacañang -- stop worrying about the losses you will incur from lower our income taxes. Instead, start to be consistent and steadfast in guarding our taxes from being stolen by corrupt officials.

Drifting away from these sentiments, and looking into the reasons behind the draft tax bill, little can we understand the hesitation of the Malacañang. It is noted that the tax bill has been drafted in preparation for the Association of Southeast Asian Nations’ (ASEAN) economic integration this 2015. The reduced personal and corporate income tax rates will make the Philippine workforce and Corporations, doing business in the Philippines, competitive with their ASEAN neighbors.

Simply put, lower income tax rates will attract foreign investors to set up and bring in their business to the country. Thus, means more jobs for the Filipinos -- our kababayans will no longer work abroad and leave their families behind.

In the midst of the ASEAN integration and while the President remains firm in its refusal to cut tax rates, investors who are in the Philippines may be realizing that doing business in our country may be costly considering the tax perspective alone. Our fear is that these investors may withdraw and transfer their businesses in countries where taxes are lower than ours. We may later find ourselves along with other hundred applicants buying out for only one open position in a company.

With the initial statement of the President opposing the proposed tax bill last month have generated negative responses on television and social media. His reluctanc e to appr ove the bill prompted a number of Filipinos to sign the petition launched by the Tax Management Association of the Philippines urging Malacañang to reconsider its position on proposed income tax bill.

The sentiment of the Filipino tax payer is for our government to hear the plea of the lower and middle income tax payers. Not every working Filipino watches the noontime show AlDub, but the noontime show has resulted to over 39 million tweets. We hope that we can do the same with the petition to Malacañang, because it is every working Filipino who is affected with the tax reform bill.

Although there are reports that the President is reconsidering the idea of tax reform, let’s hope that he sees the full wisdom of the proposal. Let’s hope that Congress will not be influenced by some detractors. While we do understand that Congress has dedicated its remaining regular sessions for the 2016 national budget, we hope and pray that they will not end 2015 without urging the President to immediately pass the bill. So long as our workers are one of the pillars of our economy, one cannot disagree to the appeal of easing their tax burdens.

Marie Fe F. Dangiwan

Let’s Talk Tax

P&A Grant Thornton

The dilemma of Philippine tax reform

The call for tax reform is ever growing in the Philippines, out of fear we are being left behind by our neighbors in Southeast Asia, coupled with concerns that our people are at the mercy of the current tax system.

Our legislators have put forward revenue bills to finally amend the almost two decade-old income tax brackets set forth in the 1997 National Internal Revenue Code of the Philippines. Unfortunately a few days ago, the House of Representatives shelved the bill proposing the reforms.

The House Committee on Ways and Means said that it was influenced by the President’s unwillingness to endorse the bill. In view of the incoming recess of Congress, the House finally decided that the remaining days of their regular session will be dedicated to finishing deliberations for the 2016 national budget. This undeniably will delay, or worse, mark the end of income tax reform under the present administration.

Under the 1987 Constitution, all revenue bills must originate exclusively in the House of Representatives, but the Senate may propose or concur with amendments. Although it seems that the Senate of the Philippines is supportive of tax reform, it cannot however make a more definitive move unless the House gets its own version of the bill approved. Having seen that the House no longer deems the time sufficient to discuss the income tax reform, the Senate and the public turned out to be waiting in vain.

What then is the role of the President in all these? Why has his disapproval seem controlling in deciding the fate of the revenue bill? It must be noted that all bills passed by Congress, before it becomes a law, shall be presented to the President. If he disapproves the bill on lowered income tax, he will simply veto it and return the same with his objections to the House. Thus, another round of deliberations ensues. Not to mention that Senate shall likewise pass upon the reconsideration of the President’s objections. Imagine just how much time and efforts will be wasted if the President will just veto the bill. Who knows, the bill might not even survive the reconsideration of Congress after the President vetoes. 

The Administration fears that lowering income tax will negatively affect the budget. I believe that the issue lies not in the amount of tax collection. Rather, it is the efficient management of funds collected. Full realization every peso’s value is a must, and blocking tax reform must not be the government’s safety net.

In addition, the taxes foregone are estimated at P30 billion, relative to a P3-trillion budget. Such an amount will not really have a noticeable impact, should the government manage the impact of the tax reform properly.

Tax professionals are appealing to the chief executive to change his mind and support the lowering of Philippine income tax. Recently, the Tax Management Association of the Philippines launched a petition urging the president to reconsider his position on income tax reform. I certainly hope that more people come forward and support this cause. Remember, unity is strength and strength comes in numbers. Let our voices be heard and don’t let tax reform die at the hands of the present administration.

Could this be the end of tax reform under the current President or will our voices be loud enough to make him reconsider?

Lorraine G. Taguiam

Let’s Talk Tax

P&A Grant Thornton

Mandatory use of non-thermal paper for tape receipts (Revenue Regulations 10- 2015)

Use of non-thermal paper for all CRM/POS and other invoice/receipt-generating machine/software shall be mandatory effective on October 7, 2015 (15th day after its publication) for new business registrants.

Considering the costs of transitioning to non-thermal paper, for existing registered taxpayers, staggered implementation shall be in effect over three years as follows:

Machines Registration date:                Implementations dates:

July 1, 2014 onwards                           On or before July 1, 2018

July 1, 2013 – June 30, 2014               On or before July 1, 2017

Prior July 1, 2012 – June 30, 2013       On or before September 1, 2016

Existing taxpayers, though, may opt to transition to non-thermal paper earlier. The use of non-thermal paper is necessary to ensure the preservation of documents over the required 10-year period.

Tax Alerts

Punongbayan and Araullo

Required format for CRM/POS issued receipts (Revenue Regulations 10- 2015)

Official Receipts and Sales or Commercial Invoice generated from CRM/POS/other similar machines/software shall be printed showing among others, the information listed below:  This also covers electronic receipts generated/issued from a network or linked to CAS or components thereof.

1.   Taxpayer’s (TP) Registered Name; 

2.   TP’s Business Name/style (if any); 

3.   A statement that the taxpayer is VAT or Non VAT registered followed by the Taxpayers Identification Number (TIN) and 4-digit Branch Code.(Example: VAT Registered TIN 123-456-789-0000); 

4.   Machine Identification Number (MIN); 

5.   Detailed Business address where such ORs/SIs/CIs shall be used/located; 

6.   Date of transaction; 

7.   Serial Number of the OR/SI/CI printed prominently; 

8.   A space provided for the Name, Address and TIN of the buyer; 

9.   Description of the items/goods or nature of service; 

10.  Quantity; 

11.  Unit cost; 

12.  Total cost; 

13.  VAT amount (if subject to 12% VAT); 

14.  Break down of VATable, VAT Amount, Zero Rated, and VAT Exempt Sales, if mixed transactions;

15.  For Non-VAT ORs/SIs and other CIs (VAT or Non-VAT) and secondary receipts, the phrase “THIS DOCUMENT IS NOT VALID FOR CLAIM OF INPUT TAX” in bold letters at the bottom receipt; 

16.  Taxpayers with transactions that are VAT exempt or subject to Percentage Tax, receipt shall prominently indicate the word “EXEMPT”. 

17.  Breakdown of Sales Subject to Percentage Tax (SSPT) and Exempt Sales, if falling under (16);

The following information shall be printed at the bottom portion of the OR/SI/CI:

1.  Name, Address and TIN of the accredited supplier of CRM/POS/other similar machines/software;

2.  Accreditation no, date of accreditation until its validity with the format “mm/dd/yyy”

3.  BIR Final Permit to Use (PTU) Number;

4.  The phrase “THIS INVOICE/RECEIPT SHALL BE VALID FOR FIVE (5) YEARS FROM THE DATE OF THE PERMIT TO USE”

For taxpayers required to provide discounts to Senior Citizens and PWDs, a space shall be required for:

1.  Senior Citizen/PWD TIN

2.  OSCA ID No./PWD ID No.;

3.  Senior Citizen Discount/PWD Discount

4.  Signature of the Senior Citizen/PWD

In order to provide ample time in procuring, reconfiguring machines and systems, adjustments shall be undertaken on or before October 1, 2015. Any extension due to enhancements of systems required to be undertaken abroad shall seek the approval from the taxpayer’s RDO which shall not be longer than six months from the effectivity of these Regulations.  RR 10-2015 takes effect on October 7 (15th day after publication).

Tax Alerts

Punongbayan and Araullo

Accrued bonuses: When to withhold?

September just kicked in reminding everyone that we are just a few months away from the season of giving.  It is also by this time when individuals from the working sector, whether from private or public, expect to receive one’s hard-earned additional income in the form of bonuses. However, such grant of incentive does not come without a price – taxes as enforced contributions are levied to apportion the costs of the government to support public needs, including every form of compensation for personal services.

Settled is the rule in so far as the income tax collected at source on compensation income is concerned, the requirement is that every employer must withhold from compensation paid in accordance with Revenue Regulations (RR) No. 2-98, as amended.   

However, this may be the clamour of taxpayers, whether on a corporate or individual standpoint, with regard the recent interpretation made by the Supreme Court (SC) in what has been perceived as a controversial and recurring issue notwithstanding the clear provisions of law and implementing regulations that are clearly established. 

In the case of Ing Bank N.V., one of the main issues submitted for resolution is whether the petitioner-taxpayer is liable for deficiency withholding tax on accrued bonuses for the taxable years ended 1996 and 1997. Petitioner-taxpayer maintains its position that the liability of employer to withhold the tax does not arise in the respective year of accrual, 1996 and 1997, until such bonus is actually distributed in the succeeding year. 

The SC in resolving the main issue anchored its position on Section 34 of the National Internal Revenue Code of 1997 (Tax Code), as amended, which provides the additional requirements for the deductibility of certain payments which refers to any amount paid or payable which is deductible from, or taken into account in computing gross income shall be allowed as a deduction from gross income only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the Bureau of Internal Revenue (BIR).  

To supplement the above provision of the Tax Code, the SC highlighted existing withholding tax regulations reiterating the same deductibility requirement wherein any income payment which is otherwise deductible shall be allowed as deduction from the payor’s gross income only if it is shown that the income tax required to be withheld and has been paid to the BIR.

Grounded from the above stated provisions of law and regulations, the SC held that petitioner-taxpayer is liable for the withholding tax on the bonus at the time of accrual and not at the time of actual payment. Also, it was held that the absolute or exact accuracy in the determination of the amount of the compensation income is not a prerequisite for the employer’s withholding obligation to arise.

Accordingly, in the same case, the application of the “withholding tax on accrual” concept was clarified by SC in one of its landmark case, Commissioner of Internal Revenue vs Isabela Cultural Corporation, where the court explained the difference between the accrual method of accounting as against the cash method for tax purposes. On the one hand, accrual method relies upon the taxpayer’s right to perceive amounts or obligation to pay the same. On the other hand, cash method of accounting characterizes actual receipt of payment. An all-events test was also put in place which requires the (1) fixing of a right to income or liability to pay; and (2) the availability of the reasonable accurate determination of such income or liability. Hence, if the taxpayer used the accrual method, the actual deduction of the expense is proper upon accrual.  Stated differently, an expense is accrued and deducted for tax purposes when (1) the obligation to pay is already fixed; (2) the amount ca n be determined with reasonable accuracy; and (3) it is already knowable or the taxpayer can reasonably be expected to have known at the closing of its books for the taxable year.  Furthermore, it is submitted that the fourth requisite pertains to the additional condition for the deductibility of an expense requiring the tax to be withheld and remitted to the Bureau of Internal Revenue in accordance with Section 34(K) of the Tax Code.

The SC reiterated that the existing withholding tax regulations supports the rules requiring every employer to deduct and pay the income tax on compensation paid to its employees, either actually or constructively.  Accordingly, compensation is constructively paid when it is credited to the account of or set apart for an employee so that it may be drawn upon him at any time although not then actually reduced to possession. 

However, in this particular case, the application of the “withholding tax on accrual” concept may run counter with one of the basic and underlying assumptions in accounting providing the fundamental premise in the preparation of the financial statements – the accrual basis of accounting. One may recall that accrual accounting means that an expense is recognized when incurred regardless whether paid or not in accordance with the generally accepted accounting principles. This may not present any issue with regard the accrual of expenses if such amount is already fixed or the amount can be determined with reasonable accuracy and it is already knowable or the taxpayer can reasonably be expected to have known at the closing of its books for the taxable year. But what if an accrued expense, in the form of bonuses, is recognized only for the purpose of financial reporting as a mere estimate or with a set of conditions that must be complied with by the employee before entitlement, such as tenure or continuity of service until the actual pay-out the following year, which immediately negates the requisite of fixing a right to receive the income. Obviously, such is not the case contemplated by the SC when it rendered this decision simply because the tax required to be withheld by the employer does not yet arise as of that moment – upon accrual of expense as a mere estimate or with a specified condition. 

After all, settled is the rule that the interpretation of a provision of law should be read and construed in harmony with another which gives the effect to the statute as a whole. It is the elementary rule in statutory construction that when the law speaks in clear and categorical language, there is no room for interpretation or construction. A plain and unambiguous statute speaks for itself, and any attempt to make it clearer is vain labor and tends only to obscurity.   

This notwithstanding, it should also be stressed that there are technicalities left unresolved by the issuance of this decision. Will the BIR automatically subject to withholding tax the accrued bonus at the time of accrual? It should not be because the issue would be the proper computation of withholding tax on each employee. However, taxpayers and the tax authorities may have different interpretation and analysis of this SC decision.  Hence, it is really important that this issue should be addressed timely by the BIR to avoid any confusion. The proper implementing rules that will plug a loophole are called upon to support the overall tax compliance drive. 

Altogether, employers constituted as withholding agents are all but willing to comply with the rules and regulations promulgated by the BIR. It is with this fervent prayer that taxpayers be guided accordingly through relevant and timely issuances.  

Daryl Sales

Let’s Talk Tax

Punongbayan and Araullo